The local currency hit an 11-month low of RM4.16 versus the dollar on heightened trade-war risk and rising US interest rates

By MARK RAO / Pic By MUHD AMIN NAHARUL

Risk-off sentiment and yuan weakness are putting pressure on the ringgit exchange value, while domestic newsflow is creating uncertainty for traders.

The local note continued to lose ground against the US dollar yesterday, hitting an 11-month low of RM4.16 on heightened risk aversion from continued US-China trade tensions, rising US interest rates and fears over a global economic slowdown.

The higher average crude oil price provided little support as the ringgit declined some 7.5% over the past six months against the greenback, despite the Brent oil contract rising 15.7%.

Oanda Corp head of trading for Asia Pacific Stephen Innes said sentiment across global markets coupled with a weaker Chinese yuan direction are the main risks to the ringgit’s performance.

“The pressure is mounting, but the ringgit has been holding as a lot of sellers emerged above RM4.16,” Innes told The Malaysian Reserve.

“While oil at US$75 to US$80 (RM328) per barrel is still very supportive for the currency, the big issues are both risk sentiment and the yuan.”

He expects the ringgit to trade towards the RM4.20 level against the greenback by year-end if risk sentiment deteriorates due to higher US interest rates, yuan depreciation and signs of global growth weakening.

Innes said the foreign-exchange market is suspicious that the People’s Bank of China may engage in currency manipulation as the central bank recently set its mid-price at 6.9098 against the dollar — the lowest since March 15 last year.

“A weaker yuan can trigger a sell-off in Chinese equities and this will affect regional equity markets,” he said.

Malaysia’s FTSE Bursa Malaysia KLCI Index fell heavily yesterday by 26 points or 1.5% to 1,708 after hitting an intraday low of 1,682.98 points.

Emerging-market (EM) currencies, including the ringgit, are set to experience more volatility as no one can pinpoint what is triggering the sell-off in global equities, Innes noted.

He suspects deleveraging of equity positions and expectations of higher term structure of interest rates are possible causes.

In an earlier research note, Innes noted lower oil prices could put additional pressure on the ringgit while Malaysia’s upcoming Budget 2019 has triggered a wave of uncertainty, especially around the new proposed taxes to be introduced.

Crude oil pared down some of its gains to trade at the US$81 per barrel level yesterday chiefly due to uncertainty over the actual impact of US sanctions on Iranian oil output and possible production hikes from Saudi Arabia and Russia.

Innes said stronger crude oil price has helped stabilise the ringgit compared to how poorly the Indonesian rupiah and Indian rupee have performed.

“Oil prices are just not giving the ringgit a lift due to all the other issues, namely an economic slowdown, fiscal concerns and trade war concerns,” he said.

The hightened volatility on global markets comes as the International Monetary Fund (IMF) downgraded its global economic growth forecast to 3.7% for both 2018 and 2019 from the previous 3.9% forecast.

This is the first time IMF downgraded its forecast since July, 2016.

ForexTime Ltd research analyst Lukman Otunuga said global growth fears are keeping investors risk-averse.

“With the unsavoury combination of ongoing trade tensions, EM weakness and global growth fears denting risk sentiment, investors will be tempted to shun riskier assets and favour the US dollar as a safe-haven investment instead,” he said in a research note this week.